What is Capital Deepening? Capital deepening refers to an increase in the capital-labor ratio. The capital-labor ratio can go higher either due to an increase in the capital stock or through a decrease in the number of workers. Capital deepening increases the marginal product of labor – i.e., it makes labor more productive (because there…
What is Economic Profit? Economic profit (or loss) refers to the difference between the total revenues, less costs, and the opportunity cost associated with the revenue generated. Opportunity cost is the cost of an opportunity foregone, i.e., given up to pursue another. For example, assume a company needs to make significant changes in their business…
What are Limitations on M&A? Mergers and acquisitions are often used in non-financial debt covenants by lenders with the intention to avoid any significant impact on cash flow on the part of the borrowing party that may or may not affect their ability to pay back the loan. Hence, by putting limitations on mergers and…
What are Total Assets? Total assets refers to the sum of the book values of all assets owned by an individual, company, or organization. It is a parameter that is often used in net worth debt covenants. The value of a company’s total assets is obtained after accounting for depreciation associated with the assets. Net…
What is Public Infrastructure? Public infrastructure refers to infrastructure facilities, systems, and structures that are developed, owned, and operated by the government. It includes all infrastructure facilities that are open to the general public for use. Infrastructure includes all essential systems and facilities that allow the smooth flow of an economy’s day-to-day activities and enhance…
What is the Natural Rate of Interest? The natural rate of interest is also called the neutral interest rate, neutral rate, r* (r-star), and the long-run equilibrium interest rate. This interest rate is the theoretical short-term interest rate that would support the economy at maximum output or full employment GDP while keeping inflation constant. The…
What is the Neutrality of Money? A staple in classical economics, the neutrality of money suggests that changes in the supply of money in an economy only affect nominal economic variables such as exchange rates, wages, and the prices of goods and services. According to the theory, changes in the money supply do not affect…
What is Full Employment GDP? Full employment GDP is a hypothetical GDP level which an economy would achieve if it reported full employment. That is, it’s the GDP level corresponding to zero unemployment in the economy. By definition, full employment GDP is Pareto efficient, i.e., the economy can’t increase aggregate output without increasing the level…
What are the Different Loan Features? Loans come with different features that can change the security of the loan, the payments on the loan, and the interest rate of the loan. The main features include secured versus unsecured loans, amortizing versus non-amortizing loans, and fixed-rate versus variable-rate (floating) loans. Secured vs. Unsecured Loans One loan…
What are the Types of Credit? The three main types of credit are revolving credit, installment, and open credit. Credit enables people to purchase goods or services using borrowed money. The lender expects to receive the payment back with extra money (called interest) after a certain amount of time. Revolving Credit A line of credit…
